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Monopolists are price makers. Which of the following explains why this does not apply to competitive markets?

User Nicolas Buduroi
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Final answer:

Monopolists can set their own prices due to having no competition, making them price makers, unlike firms in competitive markets, which are price takers. Competitive markets operate with a near-horizontal demand curve and cannot influence prices, leading to much lower prices and higher output than monopolies, which do not produce where P=MC, causing productive and allocative inefficiency.

Step-by-step explanation:

Monopolists are price makers because they exert significant control over the price of their products due to a lack of competition. In stark contrast, competitive markets are composed of many firms, and no single firm can influence market prices due to product homogeneity and ease of entry. This creates a situation where firms in competitive markets are price takers; they must accept the market price as given. A key point here is the demand curve: for a competitive firm, it's nearly horizontal, indicating that they can sell as much or as little as they want at the market price. For a monopolist, the demand curve is downward-sloping, meaning they can set higher prices but will sell fewer units.

A monopolist's lack of production at the minimum of the average cost curve leads to productive inefficiency, while not producing where price equals marginal cost (P=MC) results in allocative inefficiency. These inefficiencies result in higher prices and lower quantities of goods produced compared to a competitive market. Furthermore, monopolists may also be less motivated to innovate due to the absence of competitive pressure.

User Nyle
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